The economic factors of pest analysis

ContributorUpdated July 25, 2017

When companies are looking to invest in different countries or locate offices in those countries, their management will often seek to run a PEST analysis of that country. PEST stands for political, economic, social and technological elements within what is called an "external macro-environment," which can range in size from a major city to an entire country. Economic components of a PEST analysis pertain to labour conditions, the availability of credit, the economic system in effect, and that city or country's position on the spectrum of growth.

Labor Conditions

When a company analyses a new macro-environment with an eye toward basing some or all of its operations there, the labour market is a crucial part of the equation because so much of a company's costs go to labour. For example, one country might require a minimum wage and mandate a cap on work hours per week, while another country might be much more permissive with management. Besides costs, other factors related to labour include the unemployment rate (availability of labour), the existing skill level of the region's work force, and other labour laws affecting foreign countries doing business there.

Access to Credit

If you were doing a PEST analysis of the United States in 2011, you would note that credit was tight, not just for residential home loans but also for new businesses looking to finance operations. A PEST analysis of any macro-environment would include ease of credit, as well as the prevailing interest rates, should that credit be available. Government involvement in the credit markets, as far as interest rate caps or minimums, would also be of interest.

Prevailing Economic System

In 2011, not many companies wanted to make investments in Venezuela because the government of Hugo Chavez was nationalising many industries. For reasons like this, it's important to analyse the government's role in the economy as part of a PEST analysis. Other considerations concerning the economic system include the current exchange rate and the historical trends associated with that currency.

Other Possibilities for Growth

Some other factors to consider include recent cycles of recession or economic growth, overall trends of gross domestic product growth or contraction, and per capita overall and discretionary income for individuals.